The Return of Tariffs: Trade Wars and Economic Nationalism

January 22, 2018

On that date, President Trump signed an order imposing tariffs of 30% on solar panel imports and 20–50% on washing machine imports. Six weeks later, 25% tariffs on steel and 10% on aluminum followed, invoking a rarely-used national security provision.

By July, the US had imposed 25% tariffs on $34 billion of Chinese goods; China retaliated immediately and symmetrically. By September, tariffs covered$ 200 billion more. A full-scale trade war — the largest since Smoot-Hawley — was underway.

To economists trained in the postwar consensus, this was bewildering. Every major trade model predicted net welfare losses. Business groups, including the US Chamber of Commerce, opposed the tariffs. The Federal Reserve’s own estimates suggested the tariff war would cost hundreds of thousands of jobs.

The tariffs happened anyway — and proved politically durable across administrations. Understanding why requires going beyond welfare triangles to the political economy of trade in a post-globalization era.

I. The Economic Case Against Tariffs (Restated)

The textbook argument against broad tariffs is straightforward:

Tariffs are a tax on consumers. When the US imposes a 25% tariff on Chinese steel, American steelmakers can raise prices to just below the tariff-inclusive import price. The cost falls on steel-consuming industries — auto manufacturers, construction companies, appliance makers — and ultimately on consumers.

Retaliation destroys export markets. China’s retaliatory tariffs targeted US agricultural exports with surgical precision — soybeans, pork, corn, affected farmers concentrated in politically significant Midwest states. By 2019, US farm exports to China had fallen sharply enough that the Trump administration authorized $28 billion in direct agricultural subsidies to offset the losses.

The “trade deficit” target is a misunderstanding. Much of the tariff policy was explicitly aimed at reducing the US trade deficit with China. But trade deficits reflect macroeconomic identities — specifically, the gap between national savings and investment — not predatory foreign trade practices. Tariffs on Chinese imports shift sourcing to Vietnam, Mexico, or domestic production, but don’t change the underlying savings-investment dynamic. The overall US trade deficit did not narrow meaningfully during the trade war.

Empirical evidence from the 2018–2019 tariffs: Studies by economists at the Federal Reserve, Columbia, Princeton, and the Federal Reserve Bank of New York consistently found that the tariffs were almost entirely passed through to US consumers and businesses — not absorbed by Chinese exporters as initially claimed. The tariff incidence fell predominantly on American buyers.

II. The Political Case for Tariffs

If tariffs are economically inefficient, why did they prove so politically powerful?

The China Shock revisited. The research by Autor, Dorn, and Hanson (covered in Session 1) documented concentrated, persistent job losses in specific US communities from Chinese import competition. These communities had received no meaningful compensation and had not recovered by 2018. The trade policy consensus that free trade is “good” rang hollow to a 50-year-old manufacturing worker in Erie, Pennsylvania.

Manufacturing as identity. Economic models measure manufacturing in terms of value added; communities measure it in terms of identity, social structure, and generational continuity. A factory closure doesn’t just destroy jobs — it destroys the social fabric of company towns that were built around a single industry over generations.

National security logic. The steel and aluminum tariffs were imposed under Section 232, which allows tariffs for national security reasons. Whether domestic steel production is truly a security necessity is debatable, but the argument tapped into something real: dependence on foreign suppliers for critical inputs does create strategic vulnerability, as supply chain disruptions during COVID-19 demonstrated viscerally.

The “cheating” narrative. Successive US administrations had genuine complaints about Chinese trade practices: forced technology transfer as a condition of market access, subsidies to state-owned enterprises, intellectual property theft, currency manipulation (at various periods). Whether tariffs were the right response to these practices is contested, but the underlying complaints were not fabricated.

III. Structural Shifts: “Friendshoring” and Supply Chain Resilience

The 2018–2019 tariff war was followed by the COVID-19 pandemic (2020), which exposed the fragility of just-in-time global supply chains. Semiconductor shortages idled auto plants. Personal protective equipment couldn’t be sourced domestically. The political economy of supply chain resilience shifted dramatically.

By 2021–2022, “friendshoring” — limiting supply chains to geopolitically aligned partners — had become mainstream policy discourse in both the US and EU. The CHIPS and Science Act (2022) provided $52 billion in subsidies to semiconductor manufacturing in the United States. The Inflation Reduction Act offered large incentives for domestic clean energy production.

This marks a fundamental shift: the intellectual consensus has moved from “free trade maximizes welfare” toward “strategic autonomy requires some domestic production of critical inputs, even at higher cost.” The WTO’s rules on subsidies and industrial policy are now openly strained.

IV. Economic Nationalism: Three Intellectual Traditions

The tariff renaissance draws on intellectual traditions that mainstream economics long marginalized:

Hamilton/List tradition. Alexander Hamilton’s 1791 Report on Manufactures argued that the US needed to protect infant industries from British competition to develop an industrial base. Friedrich List’s National System of Political Economy (1841) articulated a developmental nationalist argument against free trade for industrializing nations. These arguments were mainstream in 19th-century economics; they were pushed to the fringe by the 20th-century free trade consensus and have now returned.

Strategic trade theory. As discussed in Session 4, New Trade Theory demonstrated that governments can theoretically improve national welfare by supporting domestic firms in scale-economy industries. Applied to semiconductors, AI, and clean energy, this argument has migrated from theoretical curiosity to active policy.

Geopolitical realism. International relations scholars argue that trade interdependence doesn’t necessarily produce peace — it creates mutual vulnerabilities that can be weaponized. China’s restrictions on rare earth exports, Russia’s weaponization of natural gas supply to Europe, and US restrictions on advanced semiconductor exports to China all reflect this logic.

V. What the Trade War Actually Achieved

By most evaluations, the US-China trade war achieved its stated objectives poorly:

The US trade deficit with China declined but the overall trade deficit widened
Manufacturing employment did not recover significantly
China’s technology development accelerated in sectors targeted by tariffs
US consumers paid higher prices on thousands of goods
Agricultural exports recovered only after a Phase One deal included explicit Chinese purchase commitments — which China did not fully honor

The Biden administration retained the Trump tariffs and added new ones. This bipartisan continuity suggests that the political economy of tariffs is now independent of their economic effectiveness — the constituencies that benefit from protection vote, while the diffuse consumer costs are invisible.

Why It Matters

The trade policy consensus of 1945–2016 — that liberalization benefits everyone in the aggregate and should be pursued — has broken down. What replaces it is unclear: some mixture of strategic industrial policy, managed trade, geopolitically filtered supply chains, and residual multilateralism.

For investors and policymakers, navigating this environment requires understanding not just the economics of trade but its political economy — who gains, who loses, and who votes.